Monday, April 9, 2012

Is William Cohan Right That Wall Street "Regulation" Has To First And Foremost Curb Greed?

$707 trillion in assorted derivatives floating around in the fiat financial universe? To put this number into perspective, the entire GDP of the planet is estimated at about $60 trillion (here); the entire wealth of the planet is estimated at $200 trillion (here). Derivatives are nothing more than insurance policies that investors buy to cover losses on investments. Unlike traditional insurance companies who have reserves to cover claims, those who sell derivative insurance have no reserves to pay claims, a point that was exemplified when AIG was bailed to cover the investment losses of Goldman Sachs. The problem can be easily solved - stop bailing out investors and allow them to lose money as they should. So long as investors get bailed out, there is absolutely no incentive to be a prudent investor.

Now that the world is covered in at least $707 trillion in assorted unregulated Over the Counter derivatives (as of June 30, the most recent number is easily tens of trillions greater) and with at least one JPMorgan prop|non-prop trader exposed to having a ~$100 billion notional position in some IG-related index trade, pundits, always eager to score political brownie points, are starting to ruminate over ways to put the half alive/half dead derivative cat back into the box. Unfortunately they are about 20 years too late: with the world literally covered in various levered bets all of which demand hundreds of billions in variation margin on a daily basis, the second the one bank at the nexus of the derivative bubble (ahem $70 trillion JPMorgan) starts keeling over, it will once again be "the end of the world as we know it" unless said bank is immediately bailed out. Again.